Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, welcome to today's Scandi Standard Interim Report for the Fourth Quarter of 2020. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Leif Bergvall Hansen to begin. Leif, please go ahead.

[Leif Stig Hansen, CEO, President & MD]

Thank you. Good morning, everybody, and welcome to the Scandi Standard interim report presentation. If you look on Page 1, you can see our historic annual growth of around 7% per year. Where we see this in 2020, that revenue growth had been flat, but you also see a stable margin development over time. Going more and flipping the page into Page 3, looking a bit more in Q4. It could be sold -- show our resilience in challenging environment, 3% net sales growth in local currency and 1% drop in SEK due to currency. The Retail business proved resilient to COVID-19 effect, but also challenges within Foodservice and Export segments. We delivered a 4.8% adjusted EBIT margin that can be compared to 4.3% in the same quarter of last year. Happy to say that our plant-based product launch is well underway and also that SEK 2.5 dividend is anticipated during 2021, and we will revert to that a bit later. Going on to Page 4. Looking at the Q4 demand that shows a strong Retail demand with 8% growth, representing 67% of total revenue. Also underlining what I mentioned before that COVID-19 has been very resilient in terms of the demand within our domestic market. Whereas we, in Q4, experienced an 18% drop in Foodservice sales, representing 17% of total revenue and that -- this effect is a result of a sudden new round of COVID-19 lockdown measures that were taken in various markets during the course of the latter part of last year and that also caused some inventory buildup that we have had to deal with. We've seen a 23% drop in Export, representing now 8% of total revenues. There is a significant oversupply and very low prices, which have led to a mark-to-market revaluation of our inventory. Going on to Page 5. You see Retail growth offsetting the drop in Foodservice. If you look at the chart to the right, you can see that Foodservice -- Retail, sorry, the tough one, have delivered sort of a stable growth during the year, whereas Foodservice in Q4 was a drop of 18%, as mentioned, which is more or less in line with the drop we saw in Q2 of 20%. But again, Retail is showing the resilience and Foodservice being down. We do feel that there is a large Foodservice potential once consumers are more free to move around. But as long as these lockdowns continue into Q1, we're going to have kind of an uncertain outlook when it comes to Foodservice for the beginning of 2021. Going into Page 6. We see successful mitigating actions to deal with COVID-19 and bird flu. As mentioned, there is a significant reduction in global commodity prices, and the chart to the right is just sort of one piece of the chick and the leg, how market prices have developed, has basically been halved due to this oversupply that has been sort of accelerated as further lockdowns have been imposed across basically all markets. And this development have been accelerated to some degree by the bird flu outbreak, but it's mainly COVID-19 triggering this development. Happy to mention some of the mitigating actions that we are taking to reduce our exposure to factors like this. Our Export share and the volatility usually comes have been reduced from 15% in '16 to 8% of revenue today. We've also -- that relates to the bird flu situation, being able to have an increased adoption of regional restrictions. That means that the impact will be clearly reduced. And also through increased cooking capacity, we've also been able to reduce the impact. The negative effect from COVID-19 and bird flu in this quarter is totally impacting us with SEK 31 million, what we take as nonrecurring. And also would like to draw your attention to the negative effect from bird flu. We have estimated that to be around -- up to SEK 30 million, and that is more than half of the impact we saw last time when bird flu was around and thanks to the mitigating actions I just referred to. Going on to Page 7, showing net sales by product category and country. 11% growth in Ready-to-cook Chilled primarily sold for retail, whereas we have a 10% drop in Ready-to-eat where a lot of the products go through traditional foodservice channels and also quick-service restaurants. We saw a drop in the low-margin Ready-to-cook categories, both on Export and also on some Frozen categories. If you look at the geographies, very strong growth in Norway, in Ireland and in Finland. Whereas in Sweden, we have had less campaign activity impacting margins positively. And then where we have got by far the largest exposure to Foodservice and Export, we have seen a negative net sales development. Going on to Q4, we're looking at EBIT and improved adjusted EBIT, where there is a volume effect driven by higher-margin segments or growth in higher-margin segments. We have seen an increased share of leg deboning, which is driving mix -- price/mix positively. It allows us to sell a bigger proportion of legs in our domestic market. It does at least add additional processing costs, but it's clearly margin accretive to the group. There's been other price/mix impacts mainly coming from less campaign activity and also a reduced relative share of Frozen and Export sales. OpEx being in line with previous quarters, and there's a negative currency effect of SEK 6 million. Going on to Page 9, looking at the quite impressive growth we have developed over several years organically within Ready-to-eat. That is taking a little bit of a dip last year due to Foodservice, as we can all imagine, but still areas where we see a great potential. And we don't anticipate by any means any negative effect by corona once these restrictions are lifted. And this is also the reasons why we are confident of building a plant-based business unit due to the fact that we have had a very successful development within this field. And it's largely same outlet, same manufacturing lines and so forth that is relevant when it comes to plant-based. Just talking a little bit more about plant-based, some of the products we have developed. We see this as an avenue for profitable growth, very similar and strong secular trend as we see for poultry products. See development here that's basically based on existing skill set. Used the -- basically the same plants, utilizing the relationships we have both on the Retail and the Foodservice side, both in our domestic markets but also on Export markets in Europe. I'm happy to say that the first retail listings have been achieved and we'll be -- start rolling those out in the beginning of Q2. Also, the investment in Veg of Lund is an example of our commitment and also long-term commitment to developing a plant-based business within Scandi. Talking a little bit about the segments. Sweden, we've seen successful timing of cautious volume strategy that has positive impact on margins, 2% drop in net sales and margin growth from -- going from 8.2% EBIT versus the 7.1% the same quarter of last year driven by, as I said, less campaigns, higher proportion of Chilled products coupled with a very good cost control have delivered a strong result in Sweden for this quarter. Going on to Denmark. That's the business where we are very exposed to COVID-19. It's 57% of net sales goes into Foodservice and Export versus that share for the group is 25%. So that has also caused a 10% drop in net sales, both a volume drop and also a drop in price realization, giving us the break-even result we report in this quarter. There's been an inventory buildup due to these factors, and we have had to do a mark-to-market reevaluation that had negative impact as we speak. We also -- once these restrictions are lifted, we certainly have the ability to scale up the business at short notice. Talking about Norway. Another strong quarter, 17% increase in local, 6% in SEK. Strong demand from the Retail market, where Ready-to-cook products, in particular, have been the driver. Some of the products -- some of the examples of our premium range, you see those pictures to the bottom of this page where we have been able to take EBIT up to nearly 10% compared to 8.2% in the same quarter of last year, thanks to strong operational performance both in terms of production yields, efficiency but also a very good commercial execution by the team in Norway. Going on to Ireland. Very exceptionally strong quarter with 14% growth in local currency, 10% in SEK and a record EBIT margin of 9.4% compared to 5.9% in the same quarter of last year. It is a quarter where definitely everything went right. And when we're sort of looking ahead, we do see some increased raw material prices that will have an adverse effect that we are dealing with in the market. Finland, another quarter of strong growth. 11% growth in local currency, 15% -- sorry, in SEK and 15% growth in local currency. Strong growth in Ready-to-cook Chilled and then also a market where we've got limited exposure to Foodservice. It's an encouraging margin growth that we now have delivered 5.2% EBITDA margin in 2020, also bearing in mind that the Q4 is seasonally a relatively weak quarter in Finland. We now concluded the investment to facilitate further growth that we have been going through with the team. With that, I'd like to hand over to you, Julia.

[Julia Lagerqvist, Chief Financial Officer]

Thank you, Leif. Then we turn to Page 16, coming back to the total group P&L. As we said, we had a top line growth of minus 1%, but in local currency, plus 3%, giving us an adjusted EBIT, which is up 10% to SEK 115 million. However, as said, we've had some quite large posting of nonrecurring items in the quarter. The biggest one is for SEK 21 million, which is related to the earn-out provision for Manor Farm. This is then driven by the strong Q4 results that we've had. Secondly, as you always thought, you have the COVID second wave, which has led to some negative effect, totaling to SEK 16 million here. It is mainly driven by inventory write-down, but also to a temporary closure of our main Ready-to-eat plant in Farre, some lines there. Thirdly, we have bird flu, as we also have mentioned, where we've also done some inventory write-downs coming to SEK 15 million. Finally, we have a post ready to -- restructure of Swedish subsidiaries, where we have discontinued rental agreement and also written down some associated assets, total cost of SEK 7 million. And that also brings us to the SEK 59 million in total. Looking at the net financial items. They are a little bit up versus the same quarter last year at SEK 23 million. But looking at the full year, we are significantly down. We have a high quarterly tax rate of 35%. This is driven by adjustments to deferred tax assets. But again, for the full year, we are at 20%, which is down versus the previous year. This all leads us to an earnings per share of SEK 0.32, which is down versus last year. However, if you're looking at the adjusted earnings per share, it's at SEK 1.22, which is up versus the previous year of SEK 0.84. Going to Page 17, we look at the statement of our financial position. Again, here, you can see that both the return on capital employed and the adjusted returns for equity are up. However, again, if we -- this also, of course, impacted by our nonrecurring items. So the return on equity is at 11.5%, which is down versus the year before of 14.2%. Nevertheless, the equity is still up and we have improved our equity ratio to now be at 29.3% versus 27.8% the year before. Turning to Page 18, looking at our working capital. We're a little bit up versus the Q3, but we're still at low levels with a total working capital of SEK 64 million. This has been positively impacted by continuous state aid related to postponement of tax payments, roughly SEK 31 million. And of course, versus last year, we also have some increased factoring and vendor financing. We're not taking up any new contracts this quarter, but it's up versus last year. There's a little bit of reduced inventory as well, and we have lower receivables than the year before due to the Export shipments. All in all, this leads us to a working capital/net sales of 0.6%, very low numbers. However, if I would adjust this for the state aid received, we would have been at 1%. And also if we adjust it for both state aid and financing elements in the shape of factoring and vendor financing, we would have been at 5.8% versus 6% the year before. So overall, our target level for -- adjusted for financing is to be around 6%. Going to Page 19, looking at our cash flow and our net interest-bearing debt. This year we have a slightly negative operating cash flow in the quarter, which is related to the fact that in previous quarters we had a higher performance of taxes and now we have paid some of that back, which is impacting the working capital. When looking at the full year, we do have a solid cash flow, and we have reduced our net interest-bearing debt. Now it's down to SEK 1.9 million. Going on to my final page, Page 20, some comments on our cash flow guidance. Our capital expenditure for 2020 landed at SEK 355 million. We expect that the capital spent for 2021 should be around SEK 400 million. The paid interest estimate is still to be around 3% to 3.5% of average NIBD. And the blended effective tax rate is around 19% to 20%. Looking at our contingent liabilities, we still have the Manor Farm acquisitions, as we talked to several times. It's 3 different earn-out tranches we paid in 2019, 2020 and '21. The final tranche will be paid now in '21. Looking at our dividend, the Board anticipates the dividend proposal of a total of SEK 2.60 (sic) [ SEK 2.5 ] per share for the financial year 2020, which the Board proposed to the AGM with a visibility to be at SEK 1.25 per share. And then the Board intends to propose for a second dividend of SEK 1.25 per share again on an EGM in the second half of 2021. So all in all, SEK 2.5, which is a yield of roughly 3.6%. And with that, I'd like to hand back to Leif.

[Leif Stig Hansen, CEO, President & MD]

Thank you. So going into a very important part of Scandi Standard is the way we work on sustainability under the heading of The Scandi Way, splitting our efforts into people, chickens and planet. I would like to give you a bit more extensive updates on what we're doing and where we are compared to what we usually do. Going on to the next page, you see what -- some inputs on the people side. And of course, a very big focus this time around have been how to protect our people from the pandemic. And I'm very happy to say that this has been managed very well so far. We have had little prevalence of people being sick. We have been able to operate all plants at all times. Very extensive testing and a lot of measures being taken to ensure that we have been able to avoid the disruptions that you otherwise see in parts of society. We do an ongoing employee satisfaction survey called the Scandi Pulse that we did in the latter part of last year, getting to, for our industry, very high index of 72, improved from 69 delivered from passed result. Also, we have adopted an even stricter clean label policy affecting the way we develop new products, which is another sign to our commitment within that field. Going on to the next page, talking a little bit about the chickens and the use of antibiotics and here the way we have been able to export best practice within this field. If you see in the top right corner on that page, the historic development in the use of antibiotics within our Nordic markets, which has been basically 0 all the way through, where only sick animals are treated and only after veterinarian decisions. We have a very good and rigid contractual agreement with our farmers and strong incentive systems to ensure that we keep these levels at this sort of world standard -- very unique world standards. If you go to Manor Farm. When we acquired the business, they were at sort of European average. And I'm actually very proud on that chart in the middle of this page to the right, we have been able to reduce the use of antibiotics with nearly 80% over a relatively short period of time. That's very unique. And it is the result of a long, long list of initiatives all the way through the value chain that's been able to get us to that level. It's also when you then add the Nordic business with Ireland, you see that on the bottom chart, you see the way where we -- from '17, there was an increase with the Manor Farm coming in but also the way we've been able to take it down. So as more acquisitions are likely to come and from markets where the use of antibiotics historically are very different to the levels that we practice in the Nordics, we are likely to see this curve going a little bit up and down. But I think we are very transparent here and very convincing showing our commitment and our ability to stick to our vision within this field. Going on to another one that's very important is the foot pad lesions, which is the leading indicator for animal welfare. You see on the top graph here the development in the Nordic. It is a score that's done by official veterinarians. If you sort of say what is this to be compared to, if you look at sort of -- there's not sort of a European tracking of this, but we would estimate that the European average would be something between 60 and 70 points. And we are here very, very low and even improving, as you can see on the top right. This is another area where we have been able to improve and transfer best practice into Ireland where we have seen a reduction of 72% over the same period of time. Having said that, you saw in '19 that there was an increase mainly driven by some issues with feed but also -- but it just shows how quickly this can move, but also shows how it's -- how our determination to get it down again have paid off. Going on to the next page, talk a little bit about planet and better -- how better logistics within Scandi will be able to save quite a significant CO2 emission. Just to bring you up-to-date that we are setting our goals in line with the Paris Agreement to halve our emissions every 10 years with '16 as our base. A couple of initiatives. One is a pilot project that we have done in Denmark with fossil-free cooling trailers that's being evaluated. We also made a new agreement to have CO2-neutral cold storage. That will be implemented during the course of '21. And also in Sweden, we will be moving to another logistics partner that will be saving a lot of kilometers driven and that will also be implemented in 2021, just as a few examples. Going on to Page 26, talking a little bit about the EU taxonomy just to give you a little bit of heads up what it is. I'm sure a lot of you have heard about it, but also some might not. It is a new framework that's been coming forward that's defining what and helping people to make a sort of sustainable investment. There's basically a tool to investors and companies to navigate within this field on how to build a low-carbon, resilient economy and also companies, of course, a classification system to help people navigate in this field. There will be a number of criteria and performance thresholds for the activity within the different key sectors and how we contribute to climate and environmental objectives that we do know have very little harm to the environment around us. And there's also some social requirements built into this. And there will be companies that will start reporting these activities for the year of '21. Just to give you an input from the Scandi Standard perspective, we certainly welcome an acceleration of this policy framework to develop more and more clear standards for us and companies and industries and be able to track real improvements, we really welcome that. We are very committed as a sector leader to continue to be so and even move the target further going forward. When we look at our total value chain, the biggest impact we have is the feeding and growing of our chickens, where we have sort of very ambitious and long-term policies on how to do that with an improved sort of environmental impact going forward. So we are confident that whatever target is going to be the final ones within this field, that we will be well within so. But we will not be happy with that level, we will continue to see how we can improve going forward. So very welcome this initiative. Going on to the last page, summing up this quarter. It shows Scandi Standard being resilient in a challenging environment. We continue to have solid contingency plans in case of some business disruptions due to the pandemic. As I mentioned, we have a solid balance sheet and a strong liquidity situation. We have launched the first plant-based product here in this year and will be hitting the market here in Q2. Even with the restrictions around us, we do continue to follow structural opportunities closely. And we have, as I hope, that this presentation also commit that we have a strong commitment to progress within a number of ESG parameters, and we are constantly moving in the right direction. We expect a strong Foodservice rebound once consumers are more free to move around. And Board anticipated dividend proposal of totally SEK 2.5 per share, split in SEK 1.25 at AGM and another SEK 1.25 anticipated for an EGM in the second half of the year. With that, we would like to take questions. Thank you.

[Operator]

[Operator Instructions] We have a question from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, Research Analyst]

Leif and Julia, a couple of questions from me. And starting off with COVID maybe and the bird flu, could you -- end the charges that you took in Q4 and we're halfway through Q1 and of course, the COVID situation has not really improved versus what we saw during late autumn. Could you give some guidance on what you think that you would need to do in terms of write-downs and stuff in the start of this year?

[Leif Stig Hansen, CEO, President & MD]

Yes. You're right that these restrictions that we're all having to accept are still around and they are very, very similar to what we have seen in Q4. So this is a bit -- we will estimate that the impact of about SEK 30 million that we take in Q4 will be similar in Q1 as the challenges we have in this area is likely to continue more or less the same level of restrictions also in Q1. That's our best guess, although it is a little bit of an uncertain time. That will be our best guidance.

[Daniel Schmidt, Research Analyst]

Yes. Yes. And implicitly, does that mean that when it comes to the guidance that you gave in connection with -- I think, in late November, where you said SEK 15 million to SEK 30 million, does that mean that the cost of the bird flu is going to be at the top end of that range?

[Leif Stig Hansen, CEO, President & MD]

Hello?

[Daniel Schmidt, Research Analyst]

Do you hear me?

[Julia Lagerqvist, Chief Financial Officer]

Yes. It does. Yes, I can hear you.

[Daniel Schmidt, Research Analyst]

If you didn't hear the question, I apologize.

[Leif Stig Hansen, CEO, President & MD]

No, no. Okay. Okay. Something happened.

[Daniel Schmidt, Research Analyst]

All right. And as you see it right now, is there a risk that you will surpass that cost for bird flu? Or is it contained to those SEK 30 million?

[Leif Stig Hansen, CEO, President & MD]

It is. We believe that we will be able to stick to that guidance. But this is also we have seen a couple of new cases coming in. So it is sort of based on the goal sort of we will not see many more cases coming in. But it is our estimate that we'll be able to keep the total effect within that SEK 30 million mark, which is also, as we hear, right, it is more than half of the impact we had last time around. So we expect that is still the best number we can give.

[Daniel Schmidt, Research Analyst]

Yes, yes. You mean less than half, right? Less than half I think you said.

[Leif Stig Hansen, CEO, President & MD]

Yes. More than half. Okay. Less than half.

[Daniel Schmidt, Research Analyst]

Okay. All right. And then a question on the dividend. Why 2 AGMs? Why not just go for 1 AGM and 2 installments?

[Leif Stig Hansen, CEO, President & MD]

Well, different ways of handling it. Either the Board have been looking a little bit on what other companies are doing. We believe this time, it is sort of nice to be a bit careful and prudent, even though that we have a very resilient business to the challenges. But still, that has been the reason why it has been done in this way. It's also a way for the Board and for the company to kind of test the idea about having 2 payouts during the year. So that has been the thinking behind it.

[Daniel Schmidt, Research Analyst]

Okay. And then just when you mentioned Ireland, you did say that you got some help from raw material implicitly in Q4 and that's reversing now -- becoming a headwind in Q1. Could you quantify that tailwind and headwind in any way?

[Leif Stig Hansen, CEO, President & MD]

It is a bit there. I would say the positive we saw we have in Q4 is not so much driven by feed. It's more driven by a variety of other factors. Very strong -- exceptionally strong growth, 14% growth in those brands, so, of course, it's helpful. We have seen birds performing very well. Weights coming in very well. Weight giving -- I mean just when you look through the KPIs in Ireland, you say, wow, what a quarter. So also coming to a 9.4% EBIT margin. So we just want to communicate that, that is very exceptionally high. And you can also, when you compare it to previous quarters, that really stands out. There is some -- when you look at the commodity prices globally, there is sort of a situation where feed prices are expecting to increase later in the year. How much that is going to come through, there's also usually an element of speculation this time around. And generally, in our markets, we are well protected through this pricing model we have, where there's an acceptance of feed-driven raw material inflation to be passed through. But as in Ireland, we are producing the feed ourselves, so we are much closer to it and a bit more, let's say, both up and down exposed to it. And we are -- with these feed prices moving up, we are very close in -- following that very closely to ensure that we are being fully compensated in the market.

[Daniel Schmidt, Research Analyst]

Yes. All right. And then maybe finally, just for clarification on underlying EBIT and you mark these charges well, I think, in the quarter. But am I right in saying that the underlying EBIT does include government support even though it's not a lot?

[Leif Stig Hansen, CEO, President & MD]

That is very limited. I haven't got the exact figure. Julia, have you got it?

[Daniel Schmidt, Research Analyst]

That was SEK 3 million, I think, but it's not excluded.

[Julia Lagerqvist, Chief Financial Officer]

No. But if you would look at the report, it is implicit. It's part of the underlying figures, was it so small this time, right? Yes.

[Leif Stig Hansen, CEO, President & MD]

But it's also important to say that this -- when you look at the COVID-19 impact, there's, of course, a lot of other impacts that's taken as part of ordinary business, so to speak. The whole impact on Foodservice, the gross margin in that area is very, very much down. But of course, that's something we have to absorb. So it is sort of only the effect relating to actually having closed down lines relating to this and also some write-downs. That's the kind of the only things we determined to be nonrecurring.

[Daniel Schmidt, Research Analyst]

Yes, yes. But you can, of course, at the same time, say that you've had over demand on the Retail side.

[Leif Stig Hansen, CEO, President & MD]

Well, in some areas, maybe. If you look historically, we've seen a 6% increase in our retail sales. And if you look sort of years back, that's very much the growth rate that you have seen for chicken products over quite some time. So -- but I agree, it is a bit -- this is an area that it is difficult to split what is what, yes.

[Daniel Schmidt, Research Analyst]

Yes. Absolutely. It's a tricky environment right now.

[Operator]

[Operator Instructions] We have no further questions on the phone line, so I'll hand back.

[Leif Stig Hansen, CEO, President & MD]

All right. Thank you, everybody. Sorry, the presentation was a bit longer this time, but because we were going to give you a bit more in-depth insight into some of the way we do in the ESG area. So thank you for your time, and have a great day. Thank you.

[Julia Lagerqvist, Chief Financial Officer]

Thank you. Bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.